U.S. uranium company has money woes

Posted: Wednesday, April 12, 2000

By H. Josef HebertAssociated Press

WASHINGTON -- Less than two years after the government sold its uranium business, the private company it created to take on the job is mired in financial quicksand. The deal is also jeopardizing a crucial nuclear security agreement with Russia, critics say.

USEC Inc.'s first 20 months as a private company have been anything but smooth. Its stock has dropped 70 percent, its credit rating is in junk bond territory, and its earnings have nosedived.

Amid the financial turmoil, lawmakers and others are questioning the sale. A congressional investigation has been under way for a year, with the first public hearings scheduled this week.

While investors have lost millions of dollars, some of the people who pushed hardest for an initial stock offering have profited handsomely.

''A number of lobbyists, company insiders and investment bankers made a killing financially,'' said Charles Lewis, director of the Center for Public Integrity, a private government watchdog.

In all, Wall Street bankers, Washington lawyers and lobbyists -- many with close ties to the Clinton administration -- earned more than $75 million on the $1.9 billion sale, according to contracts and interviews.

Among those talking up the stock offering in 1998 on Capitol Hill and in the White House were Susan Thomases, a New York lawyer and confidante of Hillary Rodham Clinton, and Greg Simon, formerly Vice President Al Gore's domestic policy adviser. The law firm of Skadden Arps, which represented President Clinton in the Paula Jones case, was USEC's lead attorney in the deal.

But no one pushed harder for a USEC sale on Wall Street than William ''Nick'' Timbers, a former investment banker whose 1991 report for the Energy Department touted the idea of privatizing the government's uranium business. Now USEC's chairman, he earns $1.2 million a year and so far has made $151,000 from USEC stock dividends.

Participants and transcripts of private USEC board meetings indicate Timbers argued strongly against selling the government enterprise to private bidders, pressuring instead for an initial public offering of stock. Among the rejected suitors was defense giant Lockheed Martin, which had operated an enrichment plant as a government contractor.

Timbers also touted an experimental laser technology, known as AVLIS, that he predicted would be in operation by 2005 and reduce electricity costs by 95 percent, helping make USEC profitable. But a year after the stock sale, AVLIS was abandoned as too expensive, prompting some stockholders and critics to complain they had been misled -- a charge the company denied.

USEC Vice President Charles Yulish, the company's spokesman, said the payments to underwriters and legal advisers were in line with a sale of USEC's size. He dismissed criticism as part of a ''relentless conspiracy theory'' promoted by the domestic uranium mining industry and the union representing plant workers.

Timbers declined repeated requests for an interview. But he and other USEC executives have blamed the company's problems on declining uranium prices, high enrichment costs, increased competition from European enrichment companies and losses from the Russia uranium deal.

The company's problems are not just a matter of finances -- they could also affect national security.

The government's enrichment plants -- now operated by USEC in Paducah, Ky., and Piketon, Ohio -- for years provided uranium for weapons and submarines. Now USEC sells enriched uranium for commercial power reactors, accounting for a third of all such sales worldwide and revenue last year of $1.5 billion.

In 1993, while still owned by the government, USEC became the U.S. agent for the Russian uranium deal, a cornerstone of American attempts to get Russia to dispose of some of its huge nuclear weapons material while keeping it out of the hands of terrorists or rogue states.

But the arrangement has been a money loser because the contract requires USEC to pay Russia more for the uranium than the company can sell it for in the depressed market. Last fall, USEC sought $200 million in government help, but was rebuffed.

USEC has recently beefed up its lobbying corps, hiring former White House Counsel Jack Quinn and former Senate Energy Committee Chairman Bennett Johnston, D-La., among others. Critics speculate USEC may be preparing another plea for government assistance if it fails to persuade Russia to cut its prices.

With growing uncertainty about the company's long-term survival, some members of Congress are concerned the government may yet have to step in with a multibillion-dollar bailout. Even Sen. Pete Domenici, R-N.M., who co-sponsored the privatization legislation, now refers to it as ''this disaster.''

Ironically, the government was making hefty profits -- $1.2 billion between 1994 into 1998 -- when it owned USEC. But that was before the uranium market went bust because of declining demand and huge supplies, the company's defenders say. Critics contend USEC contributed to the downward spiral by signaling it would sell a large amount of the natural uranium it inherited from the government to maintain cash flow.

''We sold a thriving government enterprise that isn't so thriving anymore,'' said William Burton, an energy lawyer and a member of the presidentially appointed board that approved the sale.

Burton opposed the sale, arguing that its impact on the Russia uranium agreement had not been examined sufficiently.

Since then, Energy Secretary Bill Richardson has privately told associates the privatization was a mistake. And last fall, he accused USEC of undercutting the Russia nonproliferation agreement by selling large amounts of its own uranium stockpile.

USEC executives said the $25 million in sales over three months last year reflected several years of contracts. But the company's large uranium holdings -- $700 million worth -- and its strategy to sell it on the open market are still of concern to nonproliferation experts.

Yulish disputed claims that USEC has sought to undermine the Russia deal, noting that USEC has already accepted 81 tons of weapons-grade uranium -- enough for 3,200 nuclear warheads -- and is committed to accept 30 tons a year under the agreement.

To reduce Russia's nuclear arsenal, the United States in the early 1990s agreed to help Moscow sell 500 metric tons of highly enriched uranium from the former Soviet weapons stockpile. Once diluted, the material is no longer suitable for weapons and would be sold as civilian reactor fuel with USEC the middleman.

But the USEC's emergence as an investor-owned company competing for profits on the uranium market suddenly changed the deal's dynamics.

''The privatization left a crucial national security initiative -- the purchase of 500 tons of uranium from Russia -- to the whim of the private market,'' said Matthew Bunn, a nonproliferation expert at Harvard's John F. Kennedy School of Government. ''It was one of the most egregious national security blunders of the Clinton team.''

Thomas Neff of the Massachusetts Institute of Technology, who conceived of the U.S.-Russia uranium deal and sold it to the government, said the sale of USEC ''privatized national security.'' He predicted the government may eventually have to bail out both USEC and the Russia deal.

But the race to Wall Street in 1998 was moving so fast that on the final day of the USEC board's deliberations on July 22, 1998, ''any questions raised that day were seen as obstacles,'' Burton recalled.

Budget crunchers and former Wall Streeters then running the Treasury Department saw the sale in terms of income for the government, and Gore viewed it as a triumph for government reinvention.

''Budget balancing was one of the factors. The second thing was that USEC was pushing it,'' recalled Joseph Stiglitz, then chairman of President Clinton's Council of Economic Advisers and one of the few senior administration officials who strongly opposed the deal.

''I could see very little benefit and very big risks,'' Stiglitz said in an interview. As a private company, USEC ''would have every incentive ... to bomb the (Russian) deal.''

Neither the national security folks at the White House, nor the State Department shared Stiglitz' concern.

''If this (sale) had been done in the light of day, it never would have happened,'' insisted Richard Miller, a lawyer for the Paper Allied-Industrial Chemical and Energy Workers Union, which represents USEC plant workers.

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